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Ray Dalio just sent a very powerful message. He was asked if the stock market is overvalued and has turned into a bubble. And his answer shocked everybody. So, do you think that it actually makes perfect sense that the stock market is hitting record high after record high at the same time that gold is hitting record high after record high?
Yes. Yes, it's very much like the early '70s and then the question To understand what's happening, we have to go back to 1930s. From 1920s up until 1929, the US economy was thriving. It was one of the fastest economic growth in the history of the United States and it led a lot of people to borrow money and invest in the stock market.
It's very difficult to watch how the market is growing while you're not investing. And if you don't have enough money to invest, why don't you go go and borrow money to invest in the stock market? However, that led to one of the biggest bubbles in history and led to the crash of 1929. And a lot of people lost their money.
A lot of people went bankrupt. Unemployment, in fact, rose as high as like 20% or 25%. The United States was on a gold standard. A single ounce of gold was worth about $20 an ounce. So, the US government couldn't simply print its way out of that crisis and it couldn't increase the supply of money. People were afraid to spend and it led to a stagnating economy.
So, in 1933, FDR passed a law that everybody in the United States had to sell their gold back to the government and it was illegal from then onwards to trade with gold. Back in the days, the gold was or the dollar was directly backed by gold. Starting from 1933, it was illegal to do that. What is the point of keeping all of that gold?
You were going to sell your gold to the government and the government will guarantee that the dollar is backed by gold. However, a year later, in 1934, the US government massively devalued the dollar and the price of gold was $35 an ounce. So, a year ago, you had to sell all of your gold at $20.67 and now the price of gold has increased almost by 41%.
It felt like robbery and that's how a lot of people felt, but it massively increased the supply of money in the economy and helped a lot of people to pay back their debts much easier and it was one of the reasons that the US economy got out of the Great Depression. However, the United States up until 1970s was on a gold standard, especially after 1945 when World War I ended.
The only currency that was backed by gold, it was the US dollar. So, the entire world started using the dollars because the dollar was backed by gold and every other currency was backed by the US dollar. That enabled international trade, but that only lasted until 1971. After 1945, the United States started massively spending money and those countries that accumulated so much dollars, they came back to the United States and exchanged their dollars for gold.
And the US gold reserves were depleted from 20,000 metric tons to about 8,000. So, the US government realized that if this trend is going to continue, the United States will simply run out of gold. So, Richard Nixon, in 1971, came out and abandoned the gold standard. The dollars were no longer backed by gold and that led to the second massive devaluation of the dollar.
The dollar instantly lost most of its value. In fact, by 1980s, the price of gold increased from $35 an ounce, which was before 1971, up to $850. There was so much money in the economy that it led to the inflation of all asset prices. On one side, wages did not grow that much. On the other side, asset prices had to adjust to a new supply of money.
Yes, gold prices rose dramatically, but so did stock prices and house prices. It led to one of the largest wealth inequalities in American history and that was the second major devaluation. But we're not over yet because starting from 2020, the United States is going through third major devaluation of the dollar.
But this devaluation is very different from all previous devaluations. This devaluation is happening gradually and behind the scenes because we're no longer back in 1971. In 1971, the United States did not had a competitor. The European Union just barely got out of World War II. China was starving. The Eastern Europe was under the communist rule.
So, the United States could do whatever it wanted. If the United States will pull out something that it pulled out back in 1971, the entire world will abandon the dollar and they will move to different alternative currencies such as the Chinese yuan or the Japanese yen or most likely the European Union's euro.
And that's why this devaluation is happening behind the scenes. But the main question is that why is the United States doing that to begin with? When you get into the point in the cycle where debt is needed to pay debt and compounds, it becomes a a problem. It becomes a problem also for the central banks.
Debt by itself is not a problem. If you're borrowing money to invest to build basic infrastructure and improve your productivity, that is great. If you're a homeless man, it's far better for you to get a mortgage and have a roof over your head because that will increase your productivity and you will be able to make far more money.
If you have to travel to your job and you don't have a car, but you need a car to get to your job, it is all right to borrow money to get a car so that you can get to your job. That will increase your productivity and you will make far more money assuming that there isn't any kind of public transport.
But the moment you reach to a position when you have to borrow money to pay off your debts, that's when the problem comes because you're not borrowing money to increase your productivity, but you're borrowing money to simply to avoid a default. So, in 2020, when the US government borrowed $3.2 trillion dollars it was mathematically impossible for the US government to ever pay off its debts.
And that's why or that's when the United States government decided that it will go on a third major devaluation of the dollar where the dollar will lose so much of its value that the previous debts will be much easier to pay. If this continues at the rate that it was in the past, the US will never pay off its debts.
But if we gradually keep devaluing the dollar, then paying off older debts will become a lot easier. Now, the CPI data shows that the inflation is about 3%. However, most of you, if not all of you, by looking at your life, you know that inflation is much higher than 3%. If we calculate inflation today the way we did it back in 1970s, the real inflation today would be about 7 to 10%.
Treasury bills pay around 4% in interest today. So, the real value of the dollar is being devalued by 3 to 6% annually. And if you look at the trajectory, the US government does not plans to stop the deficit anytime soon. The trajectory is very very clear. With each consecutive year, the US government will borrow more and more money and by 2034, at least by today's standards, the deficit will go back to $3 trillion.
That is the best possible estimate. The worst-case scenario is that the deficit will grow up to $5 trillion. The easiest way to spot how much the dollar is getting devalued is by looking at the price of gold. If the gold if gold prices are soaring dramatically, then you know that the dollar is getting devalued.
This graph shows how much central banks hold in gold reserves and Treasury bills. Treasury bills are pretty much the US dollars because you can instantly convert them into the US dollars. From 1970s up until late 1990s, you can see that most of the reserves were gold because the US dollar was devalued so much that most of the global reserves were in dollars.
However, that dynamic changed in late 1990s up until early 2000s that the dollar became so valuable that most of the global reserves were in US dollars and gold went to the second place. However, that dynamic is changing to the point where today central banks are holding as much gold as they're holding Treasury bills.
The central banks across the globe are not massively selling off their Treasuries that this dynamic is changing. What is actually happening is that the dollar is getting so devalued and the price of gold is soaring so much that if you take it in value terms, then the exact same amount of gold simply worth a lot more.
But since gold by itself did not change, it is the dollar that lost most of its value that this dynamic is changing today. If gold prices reach $10,000 an ounce, then the ratio will be 30 to 70 where 30% of global reserves will be in US dollar while 70% will be in gold reserves. It seems like the world is moving back to the gold standard.
Again, that's not because there is more gold in the world. That's not because countries are extracting far more gold than in the past, but rather because the dollar is losing so much of its value that gold is simply becoming significantly much more valued. And the trend is clear. Most likely the gold is going to reach 7 to 10,000 dollars in valuation over the next 3 to 5 years.
Normalizing the size of our balance sheet does not mean going back to the balance sheet we had before the pandemic. This is the chairman of the Fed claiming that the Federal Reserve is not going back to the pre-COVID level of balance sheet. In 2020, the Federal Reserve massively increased its balance sheet by buying both mortgage-backed securities and Treasury bills.
And the goal was that that the balance sheet should go back to the exact same level and prepare the United States for another major crisis. But the chairman of the Fed is saying that this is not happening because the global economy is shifted and we have to meet the current demand of the market, which means that most likely, yes, the Fed will get rid of the mortgage-backed securities, but the Fed will focus on buying more and more Treasury bills, which means that this number is going to continue growing, which means that there are going to be far more dollars in the economy.
If there won't be enough demand by private investors to buy US Treasury bills, then the Federal Reserve is going to step in and buy as much as possible. So, we are witnessing the third major devaluation of the dollar, just like it happened in 1934, just like it happened in 1971, and we're witnessing the third major devaluation.
But this devaluation is very tricky. A lot of people won't actually see how it's happening. The first people who are going to suffer are people who are on a consistent paycheck because your employer is not going to suddenly raise your money or raise your paycheck claiming that, "You know what, John?
Yeah, I can see that things are getting more expensive, so I want to give you a bonus." That's not going to happen. So, the wealth inequality, starting from now onwards, it actually started back in 2020, it will continue rising and life will get a lot more expensive, which might explain what is happening in the stock market today and why gold prices are soaring so fast.
That's it for today, guys. Don't forget to check the links in the description of this video. Thanks for watching, and I will see you in the next one.
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